Observations on Employee Ownership
Is It Too Risky Not to Be in an ESOP?
April 3, 2015Reporters and skeptics often ask us "isn't it too risky to be in an ESOP?" After all, they say, you could lose your job and your retirement.
It's an understandable concern, but the real question should be "Is It Too Risky Not to Be in an ESOP?"
Using data from the Employee Benefit Research Institute for non-ESOP plans and an analysis by the National Center for Employee Ownership of Form 5500 annual retirement plan filings for ESOP companies, we can answer that question quite clearly. Let's imagine you are taking the first job you expect to last a long time. We'll assume you have a private sector job. Here are your prospects for retirement plans:
Now imagine instead you go to work for an ESOP company. Here are your revised prospects:
- About 11% of you will be fortunate enough to have a defined benefit plan (a traditional pension).
- Only 42% of employees in the private sector are in any kind of retirement plan, so you are more likely to have no plan than any plan.
- If you are fortunate enough to be offered a plan, and a 401(k) plan is the only plan offered (which will be the case for about 80% of employees whose employers offer a retirement plan), only about 70% of you will choose to participate in the plan by making wage deferrals. The less you make, the less likely you are to participate at all.
- Most companies match what you put into the plan. The lower your pay, the lower both the absolute value and the percentage of pay will be matched.
- If you are a typical 401(k) participant, and you do choose to participate, your employer contribution to the plan will average about 3% to 4% of pay per year.
- If you work 30 years for the same employer, your average account balance in 2013 dollars (the latest available data) will be about $248,000, of which the majority will have been contributed by you.
- Your plan should, but may not, be diversified enough to withstand economic shocks. A small percentage of you will end up with substantially depleted assets.
- Based on data from the General Social Survey, you are three to four times as likely to be laid off than if you work for an ESOP company.
So which is riskier? Being in an ESOP or not being in an ESOP?
- You will be slightly more likely to be offered a secondary retirement plan, usually a 401(k) plan, than employees in non-ESOP companies will be offered any kind of plan. Employers will typically contribute less to the 401(k) as a match, however.
- You will be covered by the plan as soon as you meet the same minimum hours worked rules that apply to other retirement plans.
- You will almost always not need to contribute anything to get a company contribution. The company normally funds the plan and everyone in the plan gets a contribution. That means ESOPs are skewed much more favorably to lower paid employees than 401(k) plans
- The company contribution will average about twice what the average company contributed to a 401(k) plan.
- In most ESOPs, some of your company stock will be diversified over time (the average is about 20%).
- When you leave you can expect to end up with two to three times the retirement asset value of employees in non-ESOP plans and most of that will come from your employer.
- You have a very small risk that your company will fail. ESOPs default on creditors at a rate of about two plans in 1,000 every year (these data come from a 2014 NCEO analysis of bank and ESOP valuation firm data).
- if you work for an ESOP company. ESOP companies tend to value their employees more and perform better than non-ESOP companies.
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